February 27, 2023 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) filed an omnibus objection which takes issue with: (i) the Debtors' debtor-in-possession ("DIP") financing arrangements, (ii) proposed bidding procedures and (iii) the adequacy of the Debtors' Disclosure Statement [Docket No. 145].
UPDATE: On March 1st, the Court hearing the Nielsen & Bainbridge cases issued an order approving: (i) the adequacy of the Debtors’ Disclosure Statement (conditionally), (ii) plan solicitation and voting procedures and (iii) a timetable culminating in an April 4, 2023 combined hearing [Docket No. 214].
Approved Key Dates (following the Committee's omnibus objection, now sliding @10 days)
- Solicitation Deadline: March 6, 2023
- Plan Supplement Deadline: March 21, 2023
- Voting Deadline: March 28, 2023
- Plan and Disclosure Statement Objection Deadline: March 28, 2023
- Deadline to File Voting Report: March 31, 2023
- Combined Hearing Date: April 4, 2023
Holistically, the Committee argues that "the speed with which the Initial Plan Sponsors require the Debtors’ exit from bankruptcy is extraordinary…moving at warp speed in the manner the Debtors seek will annihilate the due process rights of creditors, stripping them of even the opportunity to assert—let alone seek fair and equitable treatment of—their claims."
The timing issues are particularly acute, the Committee argues, given that the Debtors' creditors (receiving their materials in English) are predominantly Chinese; with these creditors stuck with the very real possibility that they will not even receive solicitation materials (approved on February 9th) in advance of a March 8th bar date….much less comprehend the Plan's "sweeping third-party releases" and take steps to to affirmatively opt-out of those releases…before returning Plan solicitaion materials by March 8th. NB (very well, the Committee argues): These unsecured creditors (holding $82.0mn of claims) "are receiving no recovery under the Plan and are thus deemed to reject it" unless they get their opt-out letters back.
The warp speed, the Committee argues, "make clear that these Chapter 11 Cases are designed to ensure the Initial Plan Sponsors [Silver Point and KKR] own the New Common Stock free and clear of all claims (including 503(b)(9) Claims) and causes of action in just 60 days, making them the sole beneficiary of the Debtors’ bankruptcy filing."
To give a further sense of the truncated nature of these cases, in addition to a March 8th general bar date, the Debtors' DIP financing arrangements commit the Debtors to a Plan confirmation hearing by March 25th (and to the Committee's chagrin, a March 20th challenge date), bidding procedures have a bid deadline of March 19th and the Debtors Plan has to go effective by April 9th.
All of the above, to be discussed at what promises to be a lengthy hearing scheduled for March 1st.
Case Status
On February 8, 2023, Nielsen & Bainbridge, LLC and 13 affiliated debtors (dba NBG Home*, “NBG” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn ($413.0mn of funded debt). At filing, the Austin, Texas-based Debtors, "a leading global designer, manufacturer and marketer of affordable home décor products," highlighted their reliance on Chinese-sourced goods (95%), and the correspondingly significant impact of the China "trade war" and COVID-driven increases (peaking at a 400% rise) in shipping costs.
*Sycamore Partners acquired NBG Home from Kohlberg & Company, L.L.C. in April of 2017.
On February 9th, the Debtors filed their Plan and Disclosure Statement.
Also on February 9th, the Debtors filed a bidding procedures motion, which seeks approval of bidding procedures in relation to a sale of the reorganized Debtors’ equity (the “New Common Stock”) with the DIP Lenders having agreed to serve as stalking horse.
On February 10th, the Court hearing the Nielsen & Bainbridge cases issued an order authorizing the Debtors to access up to $10.0mn in new money, DIP financing on an interim basis (the “Interim Draw”) and roll-up an equivalent amount of prepetition debt. The $20.0mn balance (and an equivalent further roll-up), of what is in total $30.0mn of requested new money DIP being provided by prepetition ABL lenders Silver Point Capital, L.P. (“Silver Point”) and KKR Credit Advisors (US) LLC (“KKR”), is to be made available upon issuance of a final DIP order, with consideration of that order now scheduled for March 1, 2023.
Further to the Debtors' restructuring support agreement (the "RSA"), Silver Point and KKR have also agreed to serve as a stalking horse bidder and to purchase the emerged Debtors' New Common Stock for an amount comprised of "Allowed DIP Claims [up to $60.0mn] as of the Effective Date, plus the total amount outstanding under the ABL Facility [$58.2mn]."
The Committee Objection
The objection provides: The Debtors filed these Chapter 11 Cases to rapidly consummate a sale to certain of their prepetition lenders that will close before the Committee has had an opportunity to meaningfully evaluate the process or the claims and causes of action being released under the Plan….Through the Plan filed along with the Debtors’ first-day motions, the Debtors propose to issue New Common Stock to be purchased in less than 60 days by their majority prepetition lenders and initial plan sponsors, affiliates of Silver Point Capital, L.P. (“Silver Point”) and KKR Credit Advisors (US) LLC (“KKR,” and together with Silver Point, the “Initial Plan Sponsors”). The Initial Plan Sponsors—who also serve as the Debtors’ proposed postpetition lenders, stalking horse bidder, and Plan sponsor—have made certain that their acquisition of the Debtors is inevitable through the relief the Debtors seek through the Motions. While ensuring that the Initial Plan Sponsors’ ownership of the New Common Stock is a fait accompli is troubling by itself, the speed with which the Initial Plan Sponsors require the Debtors’ exit from bankruptcy is extraordinary, particularly when combined with the Debtors’ efforts to leave their creditor base, foreign vendors—ill-versed in the United States Bankruptcy Code—in the dark.
This combination of speed and secrecy make clear that these Chapter 11 Cases are designed to ensure the Initial Plan Sponsors own the New Common Stock free and clear of all claims (including 503(b)(9) Claims) and causes of action in just 60 days, making them the sole beneficiary of the Debtors’ bankruptcy filing. While the Committee appreciates the need for expediency, moving at warp speed in the manner the Debtors seek will annihilate the due process rights of creditors, stripping them of even the opportunity to assert—let alone seek fair and equitable treatment of—their claims.
Indeed, even though substantially all of the Debtors’ unsecured creditors are domiciled overseas in non-English speaking countries:
- The Debtors seek to bind creditors, including holders of 503(b)(9) Claims, to a March 8, 2023 Bar Date of which they will receive little to no notice. After serving numerous first-day orders on the 30 largest unsecured creditors by e-mail and firstclass mail, the Debtors inexplicably chose to serve an English-only notice of the Bar Date only by first class mail sent from the United States on February 14, 2023, which may not even arrive in Asia before the March 8, 2023 Bar Date.
- The Debtors seek to serve the Plan’s Non-Voting Status Notice, through which general unsecured creditors will have to opt-out of the Plan’s third-party releases, by regular mail (which, like notice of the Bar Date, is not likely to reach creditors on a timely basis) and again, solely in English.
- The Debtors seek to publish the combined Disclosure Statement and Plan Hearing Notice in The USA Today (national edition) which is not circulated in China, where most of the Debtors’ creditors are located.
More troubling is that the procedural course set by the Initial Plan Sponsors is bound for a dead-end: The proposed Plan is patently unconfirmable. The Plan contains sweeping third-party releases requiring general unsecured creditors, who are receiving no recovery under the Plan and are thus deemed to reject it, to affirmatively opt-out of the release in order to preserve the last remaining rights they may have. But the proposed “opt-out notice” being provided to these creditors will not adequately advise them of their rights, let alone provide them with sufficient time to make an educated decision on the issue. Thus, under the facts of this case, the release is unfair and inequitable and should thus, not be approved….Taken together, the Motions and the relief they seek evidence a process designed to award the Initial Plan Sponsors the New Common Stock with minimal competition and without notice reasonably calculated, under all the circumstances, to apprise interested parties of their rights. Taken independently, each of the Motions suffers from distinct flaws that must be remedied before these Chapter 11 Cases may proceed."
Drilling down…
Committee’s Objection to DIP Financing
The objection states, “The Initial Plan Sponsors also seek to handcuff the Committee’s ability to investigate their prepetition actions and otherwise prevent the Committee from fully discharging its fiduciary duties to unsecured creditors.
First, the Initial Plan Sponsors seek to impose a fee cap of $50,000 that may be incurred by the Committee to investigate, but not to prosecute, (a) the claims and liens of the Prepetition Secured Parties and (b) potential claims, counterclaims, causes of action, and defenses against the Prepetition Secured Parties…it is inappropriate for the Initial Plan Sponsors (in their capacity as DIP Lender, proposed Stalking Horse Bidder, and Plan Sponsor) to obtain the benefits of the Bankruptcy Code while refusing to accept the corresponding costs. The fee cap is particularly unjustified given the speed with which the Debtors and the Initial Plan Sponsors are seeking to administer these cases and the amount of work that the Committee must perform in such a condensed time frame. It is imperative for the integrity of the bankruptcy process that the Committee’s professionals be permitted to advocate on behalf of unsecured creditors without being subject to the control of insider credit-bidders whose interests are adverse to those of the Debtors’ estates and their unsecured creditors. The Committee, therefore, requests that the limitations on the use of DIP Facility proceeds and Cash Collateral for fees incurred by the Committee in connection with performance of its statutory mandate be deleted in their entirety.
Second, as with the proposed Committee professional fee limitation, the Initial Plan Sponsors are seeking to avoid the costs of chapter 11 by demanding waivers of the estates’ rights under Bankruptcy Code sections 506(c) and 552. While it has become common practice for a secured lender to request a waiver of the provisions of Bankruptcy Code sections 506(c) and 552, the granting of such requests should only occur sparingly, and primarily in situations where the debtor is likely to reorganize and not where a debtor is seeking to sell substantially all of its assets to an insider in connection with a fast-tracked section 363. If the Initial Plan Sponsors want to use the chapter 11 process, designed to make all but certain their bid is the winning bid, they should bear all costs associated with the Chapter 11 Cases that are incurred for their benefit, including the timely payment in full of all Section 503(b)(9) claims. Accordingly, the proposed Bankruptcy Code sections 506(c) and 552 waivers should be denied.
Third, there could be significant unencumbered assets, including chapter 5 avoidance actions, that are not subject to the Initial Plan Sponsors’ prepetition security interest that must be preserved for the benefit of unsecured creditors. Chapter 5 causes of action are typically held in trust for unsecured creditors and, given the DIP Lenders’ proposed roll up, are likely to be one of the only potential sources of recovery for general unsecured creditors in these cases. This Court should not approve any liens on chapter 5 causes of action, which should be expressly carved out from any liens and administrative expense claims of the DIP Lenders/Initial Plan Sponsors. To the same end, the Committee’s right to invoke the doctrine of marshaling against the DIP Lenders must be preserved.
Fourth, the abbreviated 30-day Challenge Period during which the Committee must investigate and commence a Challenge to the Initial Plan Sponsors’ liens and claims is unreasonable under the circumstances. Requiring the Committee to conduct a thorough investigation and assert any claims by March 20th (just 3 weeks from today), while participating in the sale process and preparing for a contested confirmation hearing will severely impair the Committee’s ability to protect the rights of unsecured creditors. The Court should extend the Challenge Period, ideally commensurate with any new sale and plan deadlines.
Fifth, the Committee should be granted standing to pursue Challenges against the Debtors’ Initial Plan Sponsors and insiders, as the Debtors have already abdicated their role as a potential challenger.”
Committee’s Objection to Bidding Procedures
The objection states, “While the Committee understands the urgency of the Debtors’ sales process and does not wish to unduly delay a sale, the Initial Plan Sponsors’ proposed Auction timeline is inappropriately compressed, substantially lessening the likelihood that a competing bidder will have sufficient time to prepare a Qualified Bid. Indeed, the Bidding Procedures contemplate that bids will be due on March 19, 2023, just 20 days from today, with an auction held the next day. The pace at which these Chapter 11 Cases are being compelled to move cannot be at the expense of the Committee’s ability, as an independent, noninsider fiduciary, to conduct appropriate due diligence while creating the open and fair process that section 363 of the Bankruptcy Code contemplates. The timeline for these Chapter 11 Cases should be adjusted by several weeks to ensure that all potentially interested parties are afforded a meaningful opportunity to participate in the sale process and to afford the Committee a meaningful opportunity to vet any potential bidders and to ensure that the proposed sale maximizes the value of the Debtors’ businesses for the benefit of its estates and not just the Initial Plan Sponsors.”
Committee’s Objection to Disclosure Statement
The objection states, “Besides describing a patently unconfirmable Plan and setting deadlines that all but preordain the result of this case, there is no principled basis for the Debtors to require non-native English-speaking creditors, poised to receive no return under the Plan, to affirmatively opt out of third-party releases…the Disclosure Statement provides no basis whatsoever, legal or factual, for this gratuitous and legally impermissible deemed release by non-voting creditors who are deemed to reject the Plan.
At a minimum, the following modifications to the notice procedures should be made as part of any order conditionally approving the Disclosure Statement:
- Creditors should be served, via electronic mail (if an address is available) and in hardcopy, with a plain-English summary of the proposed release and their ability to opt out of such release (to the extent the opt-out mechanism remains intact), which should be translated into Mandarin in the Solicitation Packages, at a minimum, and made available in the native language of each country where creditors reside.
- The Committee should be permitted to send a letter to general unsecured creditors (and include such letter in the Solicitation Packages) recommending that they not grant a release absent fair and reasonable consideration therefor.”
About the Debtors
According to the Debtors: “Headquartered in Austin, Texas, NBG Home is the largest provider of affordable home décor products, including lighting, accent furniture, soft goods, wall décor, frames and other categories marketed under brands such as Pinnacle, Jimco, Patton, Plantation Patterns, THRO and its most recent acquisition Quoizel. Through its leading research, innovation and product development capabilities, NBG Home offers trend-right products at affordable price points, and serves a wide variety of retail partners, including mass merchants, specialty stores, discount stores, home centers, warehouse clubs, and internet retailers."
The Disclosure Statement adds: "The Debtors are…a key supplier of affordable home décor in the United States across a portfolio of product categories, including, among others, lighting, accent furniture, soft goods, wall décor, and frames marketed under brands such as Pinnacle Frame & Accents, Jimco Lamps & Home Decor, Patton Wall Decor, Plantation Patterns, and Quoizel Lighting. A true end-to-end service provider, the Debtors’ omni-channel business model facilitates partnerships with brick-and-mortar and eCommerce retailers from design and development to logistics and fulfillment. Today, the Debtors are the only business in the affordable home décor industry that offers domestic, direct import, port of entry, and drop-ship delivery logistic solutions, positioning the Company as a one-stop solution for its retail customers. The Debtors own certain manufacturing centers in Alabama, and otherwise lease offices, distribution centers, and manufacturing centers in Alabama, Arkansas, California, Illinois, Mississippi, North Carolina, New York, South Carolina, and Texas. The Debtors primarily provide shipping and logistics services by connecting principally internationally sourced goods with mass, wholesale, and online retailers. The Debtors are headquartered in Austin, Texas, and employ approximately 730 individuals."
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